Market Commentary | October 19, 2023
Higher for Longer
With the September 20th release of the Federal Reserve’s statement we learned that they would pause in their inflation fighting, interest rate hiking campaign. Market relief didn’t last long as the conversation shifted focus to rates remaining “high for longer” and hopes of near-term interest rate cuts evaporated. By the end of September, the term evolved to “higher for longer”, the inverted yield curve flattened, and stock and bond prices fell. A stark example was the October 2nd decline of the whole S&P utilities index (XLU) by an unprecedented 7.19% in a single trading session.
Today, at the Economic Club of New York luncheon, Chair Powell indicated that the rate hikes seemed to be having their desired effect on inflation and that more hikes might not be imminently necessary. Markets rallied briefly but then reversed with the S&P 500 finishing down 0.65% and the 10 Y Treasury yield closing on the cusp of 5.00%.
The (in)Efficient Market
Markets are broadly perceived to be efficient in identifying value. In the long run, we concur. Day-to-day price dislocations are commonplace and in times of volatility, the dislocations can become extreme. Our four decades of trading experience make us believe watching markets reveals pricing disparities that can prove opportunistic.
Anecdotally, late last fall the shares of Gladstone Commercial preferreds (GOODO, GOODN) fell to prices that provided dividend yields superior to the common shares (GOOD). The resulting yield arbitrage caused us to sell the common and buy the capital-stack-superior preferreds. By the end of January, the preferred prices had recovered nicely, giving us ready capital to pursue other opportunities. GOODO and GOODN prices plunged again in April, so we were back in and can now again use them as appreciated capital to pursue other opportunities as they arise in the market chaos we described at the top.
You can’t always foresee and avoid market loss. We hold ready our ongoing analysis of more than 200 equity issues and are prepared to act in pursuit of optimal results.
Notes and Disclosure
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